The real price of solar power

An industry that relies on government finds its market falters when subsidies do, too.

June 26, 2008

An old Soviet joke serves as a reminder of the potential distorting hand of government in solving problems like energy: One Russian says to another, "Did you hear the whole world is now communist except New Zealand?" The other asks, "Why not New Zealand?" The answer: "We need some place to determine prices."

Just this week, Barack Obama promised $150 billion for renewable energy. John McCain suggested a $330 million prize for a breakthrough in battery technology. These are examples of good government intentions to "create demand" for new energy sources by throwing money and regulations at research and markets. But at some point such carrots and sticks also risk creating price distortions that cloud judgments about the real value of intended solutions.

For decades, it was assumed nuclear energy would be an inexpensive energy source. But in the 1970s, a physicist named Amory Lovins ran the numbers on how much taxpayers subsidize the industry – and would pay for the life-cycle burden of nuclear – setting the industry back on its heels.

For oil and coal, too, the real cost of federal support for these industries is still being tallied – not only in tax breaks but in adjustments to global warming and the expensive process of weaning people off these polluting and now-expensive fuels.

An essential part of the energy-policy debate must include the danger of nurturing new sources but then warping the invisible hand of the market's corrective forces as an industry grows. A good example is solar power, which is still a niche and heavily subsidized piece of the energy pie. In recent weeks, news of fickle government support for this clean energy source has rocked the industry.

In the US, Congress has failed to renew solar tax credits that expire at the end of the year. In Germany, which commands nearly half of the world's solar-power installations because of heavy subsidies, the government reduced its support in May after much political debate. In Spain, another big solar player, high subsidies are also in doubt.

Solar's market promise is being held hostage to volatility in governments hit by budget crises and competing interests. This has only made it difficult to know the long-term price of solar. In Germany, electricity consumers must pay much more in order to support the industry's growth. When they balk at the cost, government reacts and sends the industry into a temporary tailspin. In the US, Congress is stuck on whether solar tax credits should now replace credits for oil drilling.

Unsubsidized, solar energy still can't compete in most energy markets. The pay-back period is too long. Reports of more efficient solar panels are helping reduce costs but about half of the expense for solar is still borne by taxpayers.

Some advocates want Congress to commit to $420 billion in solar subsidies – nearly the same cost to build the Interstate Highway System. This might allow solar to reach price parity with other major energy sources within a decade.

But the recent lessons of fickle subsidies for solar, combined with modern regrets over past subsidies of nuclear, oil, and coal, suggest that governments should not let their support for new energy get too far ahead of market prices.